Is 2012 as Bad as It Gets for Hong Kong’s IPOs?

After hitting a four-year low in 2012, the once red-hot initial public offering (IPO) market in Hong Kong is forecast to pick up next year as the Chinese economy revives and boosts sentiment for fund-raising.

Consultancy firms KPMG and Ernst & Young both forecast this week in separate reports that companies will raise more funds in 2013 on the Hong Kong Stock Exchange than in 2012, after the bourse fell to fourth place in the global rankings for IPOs. The city was the top destination for fund raising for three years from 2009-2011.

KPMG predicts that Hong Kong's IPO market will total $16.1 billion, with about 85 offerings, while Ernst & Young estimates that the amount raised will be about $16.7 billion.

This compares with an estimated $11 billion in IPO funds this year, a four-year low and about one-third of the amount raised in 2011, according to KPMG. It is also the third-worst year in terms of funds raised, after 2003 and 2008, when the market was badly hit by the outbreak of SARS and the financial crisis, respectively.

But 2012 could be as bad as it gets, especially if China's nascent economic recovery picks up pace next year, analysts said.

"Revival of China's economy is key in order to help stabilize the IPO market and create a more attractive environment for issuers to re-launch IPOs in Hong Kong," Roy Leung, partner with KPMG China, said in a report published on Tuesday. "Chinese enterprises looking for expansion and fund raising will once again try to tap the IPO market as sentiment improves."

The biggest IPOs lined up so far for 2013 are state-owned China Guangfa Bank, which plans to raise about $5.5 billion, Mongolia's Tavan Tolgoi coal mine, which plans to raise $3 billion. Next come China Railway Materials, also state-owned, and equipment manufacturer Sany Heavy Industry, which plan to raise about $2 billion each.

China National Biotec Group, which manufactures vaccines, is aiming to raise $1.6 billion, while China Xintiandi, a Shanghai-based property developer owned by Hong Kong's Shui On Land, is aiming to raise $1.5 billion.

Comparatively, the biggest IPO in 2012 was People's Insurance Company of China (PICC), which raised $3.1 billion in the first week of December.

The IPO lineup in 2013 suggests that investor sentiment is picking up, and interest from retail investors in particular has improved in the last few flotations, according to Philippe Espinasse, a former investment banker and author of IPO: A Global Guide.

The retail portion of the PICC IPO, for example, was 17 times oversubscribed.

"This is something that we had not seen in Hong Kong for many months," he said.

Underpinning sentiment next year will also be pro-growth policies adopted by the new Chinese government, said Terence Ho, Ernst & Young's Greater China strategic growth markets leader.

Incoming president Xi Jinping has said he plans to deepen reforms in China so that economic growth will be "stable." He said he would also put effort into expanding domestic demand and fostering consumption.

"With supportive new economic policies (in China), and better and brighter economic prospects, IPO activities in the latter half of 2013 is set to improve – suggesting that it could be the right time for companies currently in the pipeline to list next year," said Ho.

China's economic growth is expected to pick up from an estimated 7.5 percentthis year, the slowest annual pace since 1999, with economists expecting at least an 8 percent growth for 2013.

However, it s unlikely that Hong Kong will return to the days of 2010 and 2011 when, $67.8 billion and $35.4 billion was raised, respectively.

The market will be dominated by so-called block trades and placements to institutional investors, as was the case in 2012, Espinasse said, adding that he "expects an uptick in (Hong Kong) IPOs next year - perhaps an increase of up to 30 percent over the volumes seen in 2012."